Exclusive Interview with Shelley Giordano from Funding Longevity
This week we discuss:
- How HECM lenders will compete under the new rules
- Potential changes to the how the HECM is viewed by seniors and HECM professionals
- The recent changes in light of the HECM’s mission
- Impact of lowered ongoing FHA premiums on the principal limit growth (line of credit)
- The ‘ruthless’ option
HUD is soliciting feedback from interested parties until September 29, 2017. Feeback can be submitted to: answers@hud.gov
Official Mortgagee Letter 2017-12 “Home Equity Conversion Mortgage (HECM) Program: Mortgage Insurance Premium Rates and Principal Limit Factors”
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4 Comments
What is generally not known about ongoing MIP is that the higher the rate is, the higher the interest costs on the loan. So not only does lower ongoing MIP reduce the costs of this lender pass through cost to consumers but it also lowers interest costs that ultimately go to investors as interest income.
While the PLF table itself is very different with PLFs going to expected interest rates of 18% rather than of the last one going to just 10%, the individual factors at the same expected interest rates can be 20% lower at ages 62-80 and even much lower for younger ages where a qualified non-borrowing spouse is involved at a 5% expected interest rate in the expected interest rate ranges of over 3% to just under 8%. Rather than marching through the weeds, margins will no doubt be very different making conditions also very different on 10/2/2017 than today for new applicants.
While upfront MIP will be four times higher for about 61% of borrowers per the actuaries and HUD, it will also be about 20% cheaper for about 39% of borrowers. But over all, costs of a HECM should drop dramatically with both the rates of the highest cost of a HECM, interest, (both directly and indirectly through a 60% drop in ongoing MIP), and generally the second highest cost of a HECM, ongoing MIP, dropping materially. Overall the costs of the average tuture HECM borrower will be less when compared to today.
Shelley is exactly right, the principal change that will be manifest all but immediately is the restructuring of the principal limit factor (PLF) tables. To watch the floor drop to 3% is all but breath taking. On adjustable rate HECMs, post October 1 margins should be more reflective of pre-2009 margins, especially at the current LIBOR 10 year swap rates. Again this should mean lower interest rates on these types of HECMs. It is unclear how far lenders will be willing to reduce fixed rate HECMs just yet but there is a growing consensus that lower rates will soon go into effect.
Now we come to the impact on the MMI Fund. First, the MMI Fund should be strengthened since termination losses should be driven down because of lower balances due for HECMs with case numbers assigned after October 1, 2017, although offsetting somewhat the reduction will be a broader return of origination fees, servicing fees, and of course, the increase in upfront (or initial) MIP.
Since over 79% of all HECMs leaving the active status through about equal amounts to full pays and reimbursed terminations, the question must be what is the impact on the MMI Fund? Generally the reimbursements exceed the MIP collected on the full pay off terminations. At that 21% of all HECMs left the active status through assignment. Losses from that source are expected to be enormous.
There is a rather silly argument making the rounds in the industry that HUD would be wiser to charge more insurance even on loss loans. This is another one of those very strange myths from those who do not understand math. So let us say the loss on a HECM is $130,000 and HUD got $20,000 more on the loan as insurance, the loss would rise by the cost of the increased insurance and the interest on the increased cost, say $5,000. So the loss goes from $130,000 to $155,000 followed by a reduction of $20,000 from the increased insurance reducing the loss on the loan to $135,000. All adding insurance to a loss loan does is increase the loss by the interest charged for the insurance increase. What a crazy argument.
James,
Since the upfront MIP comes only from the principal limit but ongoing MIP increases the principal limit, are you saying that increasing the rate on the ongoing MIP on a loss HECM only increases its loss? If so, I see your point
On the other hand increasing upfront MIP would decrease the loss on a HECM with a loss. Although you did not mention that it seems that is what you were implying.
How will this impact the LO compensation? Many LOs just do the reverse mortgages and if the comp is significantly reduced then what would the incentive to originate these loans? These loans are hard to land and takes a long time from initial conversation to application so the impact of compensation is important to understand.
It looks as if the entire industry is getting a big fat pay cut.